What Evidence Is Necessary to Prove That a Security or Investment Is Defective? - Transcript

Proving that a security or investment is defective requires more than showing investor losses—it involves examining the processes and decisions behind the creation, marketing, and sale of the investment. These cases delve deeply into the internal workings of broker-dealers and issuing firms to uncover flaws that led to financial harm. At Malecki Law, we help clients gather the critical evidence needed to hold responsible parties accountable for defective securities.

A defective security or investment is one that contains inherent flaws in its structure, design, or marketing that make it unsuitable for sale. Common issues include:

• Faulty Financial Models: Projections that fail to account for key risks or are based on unrealistic assumptions.
• Misleading Marketing: Misrepresentation of the security’s risks, returns, or Regulation Best Interest considerations for prospective investors.
• Poor Structuring: Investments designed with features that expose investors to excessive or undisclosed risks.

These defects are often rooted in the product’s creation and marketing rather than the actions of individual brokers.

Building a strong case requires obtaining evidence that goes beyond standard securities fraud claims. Key types of evidence include:

1. Internal Communications:
   • Emails and correspondence from the broker-dealer’s risk department, structuring department, and investment banking division.
   • Discussions regarding the product’s design, performance assumptions, and known risks.
   • Communications revealing concerns about the product’s viability or suitability that were ignored or suppressed.

Internal emails and documents often provide insight into whether the firm knew about the security’s flaws but failed to address or disclose them.

1. Modeling and Projections:
   • Financial models used to predict the security’s performance.
   • Stress tests and scenario analyses that highlight potential weaknesses or risks.
   • Evidence showing manipulation or omissions in performance projections.

These materials can demonstrate whether the security was built on flawed assumptions or intentionally misleading data.

1. Marketing Materials and Disclosures:
   • Brochures, presentations, and offering documents provided to brokers and investors.
   • Comparisons of marketing claims to internal risk assessments or financial models.

Discrepancies between what was disclosed to investors and what was known internally are critical in proving negligence or intent to deceive.

1. Training and Supervisory Records:
   • Materials used to train brokers on how to sell the product.
   • Records showing whether brokers were adequately informed of the product’s risks.

These documents can highlight whether the firm provided brokers with incomplete or inaccurate information, contributing to the defective sale of the security.

In a typical securities case, the focus is often on the broker’s actions and the issuer’s public disclosures, such as financial statements or press releases. In defective securities cases, however, the emphasis shifts to the internal processes and decisions that led to the security’s creation and sale.

• Standard Securities Cases: Evidence typically includes communications with the broker, publicly available financial information, and trade records.
• Defective Securities Cases: Evidence focuses on internal communications, product design documents, and marketing strategies that are not usually available in other types of claims.

Accessing this evidence often requires legal expertise and persistence, as firms may resist providing internal documents during discovery.

Proving a defective security claim involves showing that the product’s flaws were not merely the result of market forces but were inherent in its design, marketing, or oversight. The evidence must demonstrate:

• Knowledge of Defects: That the firm was aware of the security’s flaws but proceeded to market or sell it regardless.
• Failure to Act: That the firm failed to address or mitigate known risks.
• Causation: That these defects directly caused the investor’s losses.

At Malecki Law, we have experience uncovering the evidence needed to build compelling defective securities cases and advocating for our clients’ rights.

If you believe you’ve suffered losses due to a defective security or investment, it’s crucial to act quickly:

1. Preserve Documentation: Retain all communications with your broker or firm, as well as any marketing materials or offering documents related to the investment.
2. Seek Legal Assistance: Consult a securities lawyer to evaluate your case and begin the process of obtaining critical internal evidence.

Defective securities cases require a deep understanding of both the legal and financial issues involved. Malecki Law has the expertise and determination to uncover the truth and pursue justice on behalf of investors.

Defective securities can cause significant financial harm, but investors have the right to seek accountability from the firms and individuals responsible. If you suspect you’ve been sold a defective investment, Malecki Law is here to help. If you have questions for an experienced securities lawyer, reach out to Malecki Law to schedule a free consultation by calling 212-943-1233. We value your privacy and will ensure all communications remain confidential. Malecki Law is based in New York and represents clients across the world.

Transcript:

When you have a defective Securities case the communications with the broker are important but not as important as the communications internally at the broker dealer and you would be surprised at some of the emails and the models uh the running of the models when you look at it you really need the sort of the risk Department’s emails the structuring Departments emails the investment banking departments emails so internal emails you would not get in a typical Securities case because this involves the structuring and creation of the product you know in a typical Securities case you’re talking about a traded security there’s a company involved on the stock exchange you could look at their finances a lot of these are new companies without a track record and you’re investing more in an idea and a strategy than you are in a company.